Friday, November 29, 2013

November was the first month in which there is no employment related income hitting the bank account - a scary moment. At the moment, it looks like I will get a small adjustment in late January or early February.

November was a good month for my investments. Net worth increased. The combined effect of a strong performance from my emerging market equities and the steady contribution from my properties more than offset the combined effect of a decline in my NZ/AU equities and commodities, adverse FX movements and living expenses.

Here are the details:

1. my Hong Kong equity portfolio appreciated sharply. During the month, I purchased more shares in Ping An (HK:2318) and added Dynam Japan (HK:6889) and Shanghai Petrochemical (HK:338) to the portfolio. I sold shares in Jiangsu Express and China VTM. I hold shares in CMR which is currently suspended following an attack by a short seller alleging fraud. I am currently assuming a 100% loss on this position;

3.my equity ETFs increased in line with the local markets. There were no new purchases;

4. my commodities fell. Silver is my only position;

5. all of my properties were occupied with all tenants paying on time. There were only minor repair bills this month but a number of bills will be due either in December or early in 2014. Unfortunately, two buildings have received notices for a mandatory window inspection - I am hoping that I will not have to replace any windows. One tenant has given notice to terminate her lease effective mid-February. Two properties are debt free;

6. currency movements were negative, with a material fall in the AUD being less significant fall in the NZD;

7. my position in bonds remains small. Some RMB bonds matured and I have applied for a new IPO of PRC sovereign RMB bonds;

8. expenses were low.

My cash position fell slightly. I currently hold 55.6 months of expenses in HKD cash or equivalents. The IShares RMB Bond fund is included a a cash equivalent. This is above my target floor of 24 months.

For the one month period, my net worth rose by 1.41%. The year to date increase is 15.14%. This means that my mark-to-market investments have appreciated this year.

Note 1: my calculation of cash and near cash needs to be revised.

Note 2: my net worth calculation includes accruals for long term expenses such as tax, holidays, home repair etc. At the moment, it appears that I have over provided for both tax and holidays. I will make an adjustment at year end.

Thursday, November 28, 2013

I like property as an asset class - security, leverage, cash flow. It helps that all of my property investments have done well (with the exception of one lemon purchased in the 1990s). But like all investments it has its downside and I am experiencing some issues:

1. house in New Zealand: this has been a great investment, It has (probably) at least doubled in value, my current tenants have been there for about six years now (I think) and it has always been cash flow positive. But ... it's a house and houses have roofs and roofs need to be repaired from time to time and for this house that time is now (some other work will be done at the same time). In synch with the roof needing repairs, a water pipe burst and I have go a repair bill for that as well. None of this is covered by insurance. The bottom line - most of the net rent between now and March will be used to settle these bills. The good news is that the tenants wish to stay while this is being done. The better news is that rents have been rising in Auckland so I should be able to get a rent increase early 2014 once the work has been done.

2. window inspection on apartments in Hong Kong: two units have received notices for mandatory window inspection. The cost for the first one is $600. The second one will be a bit more as it is a larger unit. If I have to replace any windows, that would potentially cost HK$10-15,000 depending on which window(s) need to be done. Rather oddly, I have not received a notice for my oldest unit - I assume the government is doing some kind of roster and I will get one in due course.

3. vacancies: the bane of every property investor's existence. I have been very fortunate to have gone for such a long period without a vacancy. I was particularly fortunate that the tenant of one property agreed to stay on at a reduced rental while building renovation work was being carried on. That happy state of affairs will come to an end in mid-February 2014 as a tenant has just exercised her right of early termination (nothing to do with rent levels). I will find out then how far rents have fallen.

In the overall scheme of things, these are trivial matters and ones which every property investor needs to allow for when making investment decisions.

Unless you stick with a simple asset allocation strategy (investing in low cost index funds and periodically rebalancing) , it is inevitable that some investments will be problematic - they will not go as expected. I did some housecleaning back in April and have purged a few other loss making or "too small" investments since then. It's a good habit.

At the moment, I have the following investments which I currently view as problematic for one reason or another (listed from largest to smallest):

1. Various bonds and bond funds: In today's interest rate environment, I prefer to hold at least some of the money that would otherwise be earning zero in bank accounts in bonds or bond funds. For a retail investor, this is something of an exercise in frustration and I have mostly ended up with several very small investments in various HKD or RMB denominated bonds. Status - buy more as and when opportunities arise. I have applied for the current PRC sovereign bond IPO. The small quantities are a pain, but aren't doing me any harm.

2. Silver: I have bought and sold notional silver several times (beginning with my first purchases at a little bit over US$6 per oz well before this blog was started and most recently with a purchase at USD30.03 per oz in December 2012). Unfortunately, records of the early transactions were lost when my computer hard drive failed earlier this year so I do not know my net cost. And yes, I am still kicking myself for not selling when the price spiked to USD49 per oz. Listed because of falling price and lack of income. Status - hold. Will buy again if Silver drops to around USD18 per oz.

3. VTech (HK: 303): I first purchased these back in November 2009 and again in January 2012 paying $58.80 and $80.00 and have received some excellent dividends since then. Although not one of my larger investments, it is big enough to merit close attention and it is of concern that the share price has been drifting lower in a rising market and there is very little support for the company from analysts. That being said, the company should be a beneficiary of the expansion of China's middle class as well as US and European economic recovery. Status - hold as it offers a very good yield.

4. Vietnam Index Tracker (HK: 3087): Net of a partial sale, the average cost of my remaining investment is HK$203.89 meaning that I am sitting on a 7% loss. Status - hold. My conviction in the Vietnam story remains intact.

5. Gold coins: I have a few gold coins sitting in a safe deposit box. Purchased at prices ranging from USD1280 to USD1690 per ounce, this has been a loss making investment. Listed not only because I am holding at a loss but because it offers no yield and the value is within my definition of "too small". Status - hold. No plans to buy more.

6. China Starch (HK:3838): I paid HK$0.212 in May 2013 and have received a dividend. The shares closed at HK$0.221 today. This is currently my only small speculation. While I have no concerns about this investment, I have to remind myself that it was not purchased with a view to a long term holding. Listed only because it is "too small". Status - buy again if it dips enough (without a known cause).

7. Nufarm (ASX:NUF): my oldest investment. Although the records have long since been lost, it is a given that the combination of dividends and partial takeover proceeds mean that I would have received back my original investment years ago, it is listed because it is too small. Status - hold given the improving business performance.

8. Tesco (LN: TSCO): Recently purchased using some cash left in a UK brokerage account. Only listed because it is too small. Status - hold.

9. Whole of life insurance policy: my father took this out when I turned 18. By the time I got around to understanding just how damaging these things are for policy holders, it had reached the point where it made more sense to continue than to surrender the policy. Needless to say, just about anything else would have been a better investment. Status - hold. I have shortened the maturity date from age 65 to age 55. When it matures, I will use the proceeds to add to my NZ/Au share portfolio.

10. Chorus (NZX: CNU): I paid NZD2.68 per share on the theory that the shares had already factored in a negative decision on pricing of its copper fixed line business from the NZ competition regulator. Unfortunately the decision was much worse than anyone anticipated and the company's ability to pay dividends at all is now in question. The shares dropped to NZD1.78 today. Listed because it is loss making and too small. Status: under review - I need more clarity on the impact of the Commerce Commission decision on the company's ability to pay dividends going forward.

11. Specialty Fashion (ASX: SFH): I paid AUD1.20 per share back in 2011. A token dividend was received, but it's been a disappointment from day one. While the share price and profitability has recovered from the lows of 2012, at AUD0.84 it remains a losing investment. Listed because it is loss making and too small. Status: under review. The review is complicated by the company announcing a small acquisition today but I will likely end up selling.

There is also a modest collection of wine in bonded storage in the UK. I have not listed this for two reasons (i) valuations are uncertain and (ii) it is likely that a lot of it will end up being consumed (the next delivery arrives tomorrow). That said, there are a few cases that are too expensive to consider drinking. At some point when the market recovers, I will sell these and reinvest the proceeds in more modestly priced future drinking stock.

Items 7, 9 and 10 are small investments made using whatever cash accumulates from rent on my New Zealand property and my AU/NZ shares.

Items 4, 5, 10 and 11 are currently the only loss making investments in the portfolio.

Friday, November 22, 2013

This morning I added some shares in Shanghai Petrochemical (HK:338) to the portfolio. This is essentially an investment in a stock that I expect (or hope) will benefit from a combination of regulatory reforms and improved margins for its products. I'm possibly a bit late to be jumping into this one as the share price as already moved quite a bit, but with the most recent brokers price targets ranging from HK$2.50 to HK$3.70 and the forecast PE ratio being relatively modest, I hope there is still a reasonable amount of upside.

I paid HK$2.11 per share. Unfortunately, this was a limit order which was only partially filled and, with the shares closing at $2.21, I am not sure if I want to chase the price.

Monday, November 18, 2013

I managed to stumble my way around the Hong Kong Trailwalker on Friday/Saturday. Completing the very hilly 100 km course across the New Territories brings with it a wonderful sense of accomplishment and a lot of pain. I am tempted to do it again, but really need to (i) train harder and smarter and (ii) figure out ways to reduce the blistering on my feet (which was seriously affecting my speed over the last two stages). Having three great team mates and a wonderfully dedicated support team really added to the experience.

Full credit to Oxfam not only for their consistently excellent organisation and management of the event but also for neatly foiling the efforts of selfish and greedy local residents who tried to block the route as a means of extorting land belonging to the Hong Kong people for their own commercial gain. All the protesters managed to demonstrate is their own arrogance and greed. It is long past time that the ridiculous apartheid-style land ownership claims of the Kuk were dismissed with the contempt that they deserve.

Tuesday, November 12, 2013

I have sold my shares in China VTM (HK:893). This has been a disappointing investment (to put it mildly) beginning with a small investment when the iron ore price was just beginning its slide and ending when I doubled my investment in an attempt to arbitrage the unsuccessful privatisation. While I remain mystified why anyone voted against the privatisation proposal, the fact is that it failed and the company's share price plummeted. Having spent more time than I should going through the company's financials, press releases (not many of use) and other public information, I concluded that I had very little understanding of the company's assets (mine life in particular) and that a dividend was unlikely. A strong balance sheet with plenty of cash were not enough to overcome these issues. The only two things that caused me to hesitate were (i) the upsurge in China's iron ore imports and (ii) the possibility that there will be another attempt to privatise the company in the future. In the end, I concluded that my money was better invested elsewhere - even if I am not sure what the "elsewhere" will be yet.

I have added shares in Dynam Japan Holdings (HK:6889) to the portfolio.

The company sells on very modest fundamentals with a trailing PE of 7.2, a dividend yield in excess of 6% and strong free cash flows. The balance sheet is strong with a reasonable amount of net cash on hand (33.5 billion yen). ROE is high at 19%. The negatives are a diversion into property development in Mongolia (!) and the fact that most of the revenue is derived from pachinko (a declining industry) and is denominated in yen. The former should be addressed in time with the company stating that it will refocus on gaming and the latter through diversification into other gaming ventures (which carries its own risks).

Wednesday, November 06, 2013

Since I am no longer earning a salary and do not want to run down my cash reserves too far, I need to get into the habit of selling shares from time to time. After doing a brief review of the portfolio over the last few days, I sold Jiangsu Express (HK:177) yesterday.

I have four companies which invest in PRC toll roads all of which have suffered due to PRC government imposed reductions in tariffs (including "free" days when extra pollution generating activities are encouraged). Jiangsu Express was the one selling closest to analysts valuations and on the highest PE. In addition, there was a rumour that the PRC government would reduce the concession period from 30 to 25 years (which would do even more damage to the industry). I will miss the 4.7% trailing yield.

I received $9.45 - 9.48 for my shares. This was one of my better investments. I paid HK$5.52 and have received $1.34 in dividends (net) for a 95% profit over (about) two years.

On Monday I purchased some additional shares in Ping An (HK:2318). At current prices it looks the best value in the insurance space in Hong Kong/China (possibly because of concerns over its activities outside the insurance space). Given the growth of the middle class consumer in China, my expectation is that this industry has considerable room to grow.